INDIA BONDS-India bonds rise as states cut supply in weekly auction

By Khushi Malhotra

MUMBAI, Jan 12 (Reuters) - Indian government bonds gained early on Monday as traders welcomed a lower-than-expected supply in this week's state debt sale, easing fears of a supply glut following a record borrowing plan for the quarter.

The benchmark 10-year 6.48% 2035 bond yield IN064835G=CC was at 6.6263% as of 10:07 a.m. IST, versus 6.6401% at Friday's close.

Bond yields move inversely to prices.

States are set to raise 268.15 billion rupees ($2.97 billion) at Tuesday's auction, below the 362 billion rupees previously scheduled, offering near-term relief on supply.

"Lower-than-expected SDL (state development loan) supply at this week's auction has lifted sentiment," a primary dealer said, adding that it still may not be enough to pull the 10-year yield below 6.60%.

The benchmark 10-year yield has drifted higher about 5 basis points since the start of the year, as investors question demand for heavy supply in the final quarter of the fiscal year, with the central and state governments slated to raise a record 8 trillion rupees via bond sales.

The Reserve Bank of India's consistent liquidity injections have also failed to cheer traders as the banking system's cash surplus hovers near neutral levels.

The RBI has bought 2 trillion rupees of bonds since December to boost liquidity. It will further buy bonds worth 500 billion rupees later in the day and conduct a $10 billion foreign-exchange swap on Tuesday.

Traders also remain cautious as the deepening feud between the U.S. Federal Reserve and President Donald Trump may stoke further uncertainty.

RATES

India's longer-duration overnight index swap rates fell on Monday tracking lower US Treasury and Indian government bond yields.

The one-year OIS INR1YMIBROIS=CC was flat at 5.49%, while the two-year OIS rate fell about 2 bps to 5.57%. The liquid five-year OIS rate INR5YMIBROIS=CC dipped 1.25 bps to 5.94%

($1 = 90.2330 Indian rupees)